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B RIAN HOOPS

By Staff | Oct 29, 2009

Have you ever wondered why it is so hard to figure out the commodity markets? Why is it that so many of us fail to market and trade well, leaving large sums of money on the table due to poor marketing or allowing “the board” to get our money when trying to invest. Much of the stress and failures can be tied to our own psychology.

Everything we have been taught, every rational or logical thought is thrown by the wayside in the commodity markets. Where in the real world, a red light means stop; a red light means go in the commodity markets. How many times have you heard of a market receiving bullish fundamental data from a monthly USDA report only to end sharply lower after receiving the news? It is hard to understand the psychology of the markets, but even harder to understand our own emotional and rational thinking.

A number of years ago, a reporter asked a well-known commodity trader about his odds of making money in the commodity markets. The trader replied with a straight face, “the odds are 50-50 you will lose 90 percent of the time.” Generally speaking, it is well believed that over 80 percent of the participants in the marketplace will lose money each year. It is the minority, the 20 percent, who make money.

To examine how your mind works in a trading situation, let’s take a simple test. I will give you a pair of trade scenarios for you to consider:

1) There are two possible out-comes of the first trade – A sure win of $3,000 or an 80 percent chance of winning $4,000 with a 20 percent chance of making nothing. Which will you take?

2) Our next trade is a choice between sure loss of $3,000 or an 80 percent chance of losing $4,000, with a 20 percent chance of losing nothing. If you don’t understand, read again and then decide which outcome you will choose.

If you are like most people, in scenario one you opted for the sure $3,000 gain. In terms of math, though, even though the second choice was better. In scenario two, about 90 percent of people select the second choice, losing an additional $1,000 to gain a 20 percent chance of losing nothing.

Now two professors at the University of Chicago have conducted this survey and many other similar tests and have come away with a fascinating discovery among commodity traders. The bottom line of about 10 years of research and testing over 100,000 minds is:

The typical person avoids risk when seeking gains and the typical person embraces risk to avoid losses. It gets down to this; the way we are made is such that the fear of loss is more powerful than the hope of gain. So guess what happens when it comes to trading? The fear of loss forces you to take additional risk, which is the risk of removing your stop or simply trading without one.

The other side of the coin is that we avoid risk when seeking gains. Hence, once you’ve got a profit, you will exit too soon to avoid further risk of getting greater gain. Now that you know how you act and re-act, you need to purge and cleanse that old noggin to a winners’ way of thinking, that is, let profits run and cut losses short.

Corn analysis

Corn closed the week $.25 3/4 higher. Large scale fund buying, fueled by harvest delays and outside market influences drove prices higher. The U.S. dollar fell to new lows for the move, igniting fund buying. However, corn did post a bearish reversal to end the week after achieving a 62 percent chart objective. The USDA estimated

U.S. corn harvest is now 17 percent complete versus 13 percent last week, 28 last year and 46 percent average. The harvest pace remains very slow and current forecasts call for more rain. Eventually the crop will be harvested, but it will take more time than expected. With the large rally and tightening basis levels, producers should be taking advantage of this marketing opportunity and rewarding the rally with sales. The 62 percent retracement level has been achieved, which mandates producers increase their marketing efforts.

The weekly export sales report showed net sales of 234,900 metric tons resulted as increases for Japan (330,900 MT, including 59,300 MT switched from unknown destinations), Mexico (87,000 MT), South Korea (64,100 MT, including 55,000 MT switched from unknown destinations). So far, this year’s sales are outpacing last year’s figures, 666 million bushels versus 638 mb.

Soybean analysis

Soybeans closed the week $.28 1/2 higher. Large fund buying, fueled by harvest delays and outside market influences drove prices higher. The U.S. dollar fell to new lows for the move, igniting fund buying. However, with more soybeans out of the fields compared to corn and South American planting at a record pace, the upside for soybeans may be limited. Soybeans also achieved a 62 percent Fibonacci chart objective. The USDA reported U.S. soybean harvest is now 30 percent complete versus 32 percent last week, 64 percent last year and 72 percent average. As of Oct. 16, the Brazilian soybean crop was already 13 percent planted, sharply ahead of the five-year average pace of just 6 percent and even well ahead of last year’s previous record pace of 8 percent. With plentiful sunshine punctuated by periodic rains, planting conditions across much of Brazil have been quite favorable so far.

The weekly export sales report showed net sales of 987,300 MT resulted as increases for China (741,500 MT, including 165,000 MT switched from unknown destinations and decreases of 89,500 MT), Mexico (92,900 MT), unknown destinations (43,100 MT), Japan (43,100 MT), and Spain (38,700 MT.

Brian Hoops is president and senior market analyst of Midwest Market Solutions Inc. Midwest Market Solutions is a full-service commodity brokerage and marketing advisory service, clearing through R.J. O’Brien.

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